Retirement-plan withdrawals easier

Hurricane victims get easier access to 401(k) money

(Editor's note -- This is an update of a Sept. 15 story to clarify distinctions between 401(k) loans and hardship distributions.)

SAN FRANCISCO (MarketWatch) -- Hurricane Katrina victims and their relatives are eligible to pull money from their 401(k) and similar retirement plans without the restrictions normally placed on such distributions, the U.S. Treasury Dept. and IRS announced Thursday.

Victims who live or work in the disaster area who have money stashed in a 401(k), 403(b) plans or some 457 plans can now access that money under looser guidelines. Before, plans restricted distributions to specific purchases or financial hardship under a strict definition.

Relatives of victims eager to help their family members can also pull out money for the purpose of aiding relatives in the disaster area, according to Eric Smith, an IRS spokesman.

But taxes are owed on withdrawals from a retirement plan, and victims must look to Congress for relief from the 10% early-withdrawal penalty.

Both the House and Senate passed similar but slightly different broad tax-relief measures targeting Hurricane Katrina victims on Thursday. Both bills waive the 10% early-withdrawal penalty and allow the taxes owed on the funds to be paid over three years, but it remains to be seen how long it will take to reconcile the bills into one law.

"Today's action will allow those devastated by Hurricane Katrina access to much-needed money as they work to rebuild their lives," Treasury Secretary John Snow said in a press release.

"I also applaud action taken in the House and Senate today to provide tax relief to Katrina victims and to allow these withdrawals to be made without penalty."

Before, hardship withdrawals were limited to a strict definition of financial need. This ruling eases the criteria, allowing employers to offer access to the money without worrying that they're violating regulations.

"Basically, it says that they can make distributions that are related to Hurricane Katrina and the fact that they're doing it is not going" to go against the rules, Smith said. This "provides some relief to the plan sponsor."

The ruling also eases victims' paperwork burden if they opt to borrow 401(k) money, rather than take a distribution.

"With loans, some of the paperwork requirements and documentation requirements are relaxed," Smith said. If a worker is unable to provide the paperwork now, the employer can hand over the money and get the documentation later, he said.

"The main thing is to give them a lot more flexibility in handling the loan so people can get a hold of their money more easily and with a minimum of red tape."

Relatives in other parts of the country are also covered by the new rules. That means someone who has a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area can dig into their retirement savings to help that relative.

Tax relief for relief workers

Separately, the tax agency afforded extra tax-preparation time for relief workers aiding in the recovery effort. As is already the case with businesses and individual taxpayers based in the disaster area, relief workers now have until Jan. 3 to file and pay taxes, the IRS said Wednesday.

The extension applies to the Sept. 15 deadline for estimated taxes and calendar-year corporate returns with automatic extensions; the Oct. 17 deadline for individuals who filed a second extension; and the Oct. 31 deadline for quarterly federal employment and excise tax returns, the agency said.

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